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For Immediate Release
Office of the Press Secretary
June 8, 2006
Press Briefing on the Administration's Updated Economic Forecast by CEA Chairman, Dr. Edward Lazear
2:13 P.M. EDT
MR. LISAIUS: Good afternoon, everyone. It's Ken Lisaius with the White House Press Office. Welcome to our on-the-record conference call briefing on the administration's updated economic forecast. Today's numbers reflect a joint effort on the part of the Council of Economic Advisers, the Office of Management and Budget, and the Department of Treasury.
At this point I'm going to turn the call over to the Chairman of the President's Council of Economic Advisers, Dr. Edward Lazear.
DR. LAZEAR: Thanks very much. Today we're releasing an update of the administration's economic forecast. We produce an economic forecast twice a year. This version will be an input into the mid-session review of the budget, but the economic forecast doesn't include any revenue or budget numbers. Those numbers will be released in the mid-session review in July.
The forecast includes the key economic indicators needed for an understanding of the nation's economic outlook and for forming the federal budget, such as GDP and the unemployment rate. Today's forecast looks much like the one released six months ago. The economy grew at an impressive 5.3 percent annualized rate in the first quarter of this year. It also appears that the economic strength is broadening, with stronger growth in business investment and exports.
The economy has added nearly 2 million jobs in the past year, and more than 5.3 million jobs since August of 2003. Today's updated forecast reflects faster-than-expected economic growth in the beginning of 2006, with the growth projected to moderate somewhat in the future, and then remain at a robust pace. We're forecasting for 2006 3.6 percent real GDP growth, which is above the historic average, about 156,000 more payroll jobs per month, which is about the historic average, and a low unemployment rate of 4.7 percent, which is below the historic average.
This economic growth is largely due to the hard work of the American people, coupled with the President's low tax and pro-growth policies. Thanks very much, and I'd be happy to take your questions.
Q I just was wondering how concerned you are about the slide that we're seeing today in the stock market, which, as you know, comes on the heels of some declines earlier in the week? The markets seem particularly jittery lately, and I'm just wondering if you're concerned about the volatility?
DR. LAZEAR: Well, as you point out, the market has been volatile in the last couple of weeks. But the volatility is not unusual in the stock market, and if we look at the numbers in the market, we are up considerably since last year. We're up about 4.5 percent from a year ago today, in terms of the S&P 500. So, you know, seeing movement up and down is not unexpected, but, obviously, you know, we like to see things move up. But, again, we don't think of this as being particularly alarming.
Q I wondered if you could comment or characterize your level of concern about inflation in the economy and how that -- you know, it looks like you revised up your numbers from six months ago. And particularly what kind of a drag are oil prices going to have and a slowing housing market?
DR. LAZEAR: Okay, thanks. Sure, yes, we did revise up our inflation figure. That revision does reflect in large part the increases in energy prices that took place during the first half of this year. I guess I'd make two comments on that.
The first one is that we don't expect that high increase that we saw in the first part of the year to cascade into future periods. If you look at our forecast, what you'll see is that the inflation rate is expected to decline to about 2.5 percent. That's consistent with market expectations, as well. And I think the reason that we believe that, as well as the market believes that, is that the oil prices are -- at least as we see it right now -- a one-time increase that's already been played out. So we don't expect that that's going to project into the future.
The second thing I would say on that is that despite the fact that we had pretty significantly rising energy prices during the first quarter, during the past few months, we also had at that same time 5.3 percent growth in GDP, annualized. So we're seeing really extraordinary growth during this period during which we had high inflation. I think the reason for that can be attributed to the very high levels of productivity growth that associated with it.
So while high energy prices are not something that we welcome, the fact that the American economy has been so dynamic and so rapidly growing in terms of productivity has been a factor that's been able to offset the increase in energy prices. So I think that we're still on a very good track. We are very optimistic and very enthusiastic about the future, and don't anticipate that energy prices will be a significant damper at the macro economic level.
That said, I'm also well aware that higher energy prices have affected individuals and have affected them in significant ways in terms of their cost of transportation, cost of heating their homes, and so forth. And we don't ignore those issues, but we do think that they're going to moderate into the future.
Q Thanks, very much. I was wondering if you saw -- I was wondering if you saw any signs that inflation expectations out in the economy are rising at a concerning rate?
DR. LAZEAR: No, in fact, I think it's quite the opposite. Again, if you look at the best indicators of inflation that the market has are things like the TIPS data, or if you look at the yield curve. That gives you an indication of how the market is viewing inflation. And all of those indications are consistent with the kinds of forecast that we're giving you, which is right around 2.5 percent, and two-and-a-half percent kind of steady out into the distant future.
So our forecast and the market forecast are very much consistent right now. So we're not seeing any significant increase in the future.
Q Thank you. Your scenario looks very much like a sort of the -- the proverbial soft landing where the growth slows to trend and there's no takeoff in inflation, and the economy continues to generate jobs, and so forth. At the moment, of course, there's a lot of concern in the markets that in dealing with the inflation risk -- the Fed and, indeed, other central banks -- financially raise rates to the point where they tip the economy into at least a growth recession, or indeed, even an outright recession. How confident are you in the scenario that you paint? Do you have a high level of confidence in the soft landing scenario? And what makes you confident that the tightening of interest rates won't, indeed, lead to the economy undershooting?
DR. LAZEAR: Yes, that's a good question. The way I see it is that all of the indications that we've seen are that we are moving to a soft landing. And the best indicator I guess would be to look at the housing market, which is the one area where people have significant concern. We always look at that; it's a very important part of the economy. And what we've seen in the housing market is that new housing starts have declined, and declined pretty significantly over the past few months, but at the same time, prices in the housing market are still going up, and they're not going up at the kind of astronomical rates that we saw over the past couple of years, but they're going up at much more moderate rates.
So the decline in the housing starts, to levels, by the way, that I should mention, are still well, well above the historic average -- we're still at very high rates in the housing market. It's just that we're coming down from kind of an extremely high rate. But that is consistent with the soft landing scenario.
The same thing is true in the aggregate numbers. What we're seeing is a broadening of the investment pattern and consumption pattern. Initially you were seeing investment in residential construction; now you're seeing it in commercial construction, in all kinds of business investment. And at the same time, we're seeing export growth, as well. So all of those are consistent with this deepening and broadening pattern, which we feel is commensurate and consistent with having a strong economic growth, but also kind of a soft slowdown to what we think of as a long-term trend.
Q Do you have an implicit or an explicit estimate as to what productivity will be over this forecast period?
DR. LAZEAR: Well, Bob, we do -- we have a large number of variables that are associated with our estimates that go behind the numbers that we released today. But we don't actually release numbers on productivity. That's not to say that we don't have that as part of the model; they certainly are part of our model and there are a large number of variables that are part of our model. But we think of these nine variables as being the main focus of this activity. And the reason for that is that the primary motivation behind this activity is the budget process, and these are the numbers that are crucial for the budget process.
So the productivity number, which obviously is of relevance in terms of thinking about the future economy, is not of relevance for this particular process. Things like GDP growth, interest rates, CPI, those are all much more closely related to the budget process, itself, and that's the purpose of this exercise.
Q Hi, Dr. Lazear. This is just a small, technical question. I was wondering, the unemployment figures are an annual average?
DR. LAZEAR: The unemployment figures -- yes, the unemployment figures are the annual average; that's correct.
Q Okay, great. Thank you.
Q Dr. Lazear, you mentioned the business investment and you said export growth, as well. And I was wondering, can you just elaborate on the export growth part. I mean, is it sufficient -- do negatives run into deficit? And why do you see export growth; what are the factors playing into that?
DR. LAZEAR: The export growth that we've seen -- we have seen export growth for a few months now; we're still in the early stages of it. Last month the current account deficit actually started to decline and, you know, we're always keeping our eye on that; that's obviously an issue and a concern.
It was mentioned earlier that we wanted a soft landing -- this is another area in which soft landings are particularly important, because if all of a sudden the current account were to simply reverse and go to zero, what that would also mean is that the capital inflow would go to zero -- and the capital inflow has been a very important factor in keeping our growth rates high.
So what we see in terms of export growth and import declines, we think is kind of -- is not only in the right direction, but really at the right pace, as well. A good bit of this depends not only on our economy, but some of it depends, as well, on the economies with which we trade -- as they start to grow, as their economic situations become better, their demand for our goods goes up, and that's another reason to expect that our export growth will be positive and pretty significant over the next few months, so -- the next couple of years, actually. So we're pretty hopeful on that and reasonably confident that that's what's going to occur.
Q Hey, Dr. Lazear. One follow up. If the economy is so strong, why is the dollar so weak?
DR. LAZEAR: Well, the economy is very strong right now, and we know that movements and currency markets depend on a variety of market factors. We believe that the market factors are the appropriate ones for determining currency movements. And we think that the market is telling us basically what it should be telling us. We see no reason to be alarmed by anything that's happening out there.
Q Thank you. Dr. Lazear, you're -- you have a rather modest inflation forecast. The inflation hawks are pointing a lot at commodity prices and, to some degree, as with the previous question, foreign exchange rates. Your model seems to be giving more weight to the yield curve and interest rates. Why -- why do you give that weight to interest rates as opposed to what some of the inflation hawks are giving weight to, namely commodities?
DR. LAZEAR: The reason that we look at that is, again, that we think that our methodology is not only consistent with what we believe just kind of in the abstract, but also what we think that the market is saying. And my view has always been that we want to use all the information that's out there, and the market uses all the information that's out there. Most of the information we use -- all of the information, in fact, that we use in terms of constructing our forecast is public information. So it's not that we're using anything that's secret. We're processing it pretty much in the same way that the market is processing it. So our inflation rate and the market inflation rate look pretty much the same; the blue chip inflation rates are the same. We're all basically right on. So I don't think that there's any big puzzle there.
MR. LISAIUS: All right, that's going to have to wrap us up for today, operator. I thank everyone on the call. If you have additional questions, you can always call the Press Office at the White House and we will try to help you out. Thank you very much.
END 2:30 P.M. EDT